It has been a pretty long time since you were able to park some money in treasury bonds, CD’s, or savings accounts and get a decent interest payment. Interest rates in these types of investments have been trending lower since the late 1980’s and are at the lowest they have ever been here in the U.S. I certainly don’t see them rising anytime soon based on what is going on in the world right now. So, how do you get a decent rate of return on your money without having to take on too much risk?
It is very tough to do in this interest rate environment, but if you don’t need the money for at least 2 years, you can find some decent places to park your money and get a reasonable rate of return for relatively low risk. For the equity section of the investment universe, here’s what I look for in companies to help select a stock to put my low risk money into:
Industry sustainability – This should be an industry that is not likely to go away anytime soon. Utilities, food producers, and mobile phone service providers are some good examples of industries that should be around for a while.
Payout ratio – This is the percentage of a company’s earnings that it pays out to its shareholders. For instance, a stock that has a payout ratio of 50% means that the company takes 50% of its earnings and pays it to its shareholders in the form of a dividend. I try to avoid stocks that have a payout ratio greater than 60%
Free cash flow – This is the amount of cash a company has left over after it pays for all of its operating expenses and capital expenditures. Put simply, it’s the amount of cash remaining in the coffers after a company pays all of its bills. I like companies that have free cash flow that is at least 5% of its revenue.
There are many other variables that I take into consideration but if I had to pick only three, I would use these. To further reduce your risk, you should consider a basket of stocks that fit these criteria. The easiest way to do this is via sector ETFs, like a utility ETF or a telecom ETF.
Stay safe and let me know if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
